The Role of Target Termination Fees in REIT Mergers

Target termination fee provisions are widely used in merger agreements and require the target firm to pay the bidder a fixed cash fee in the event the target firm backs out of the agreement. We examine the determinants and consequences of target termination fee provisions in REIT mergers and test the competing agency and efficient contracting hypothesis. We find that target termination fee provisions are more likely in hard to value targets, that is, in deals involving large targets, targets with high leverage, and firms that were not targets of a takeover attempt in the recent past. Our results also suggest that target termination fee provisions are associated with higher offer premiums, announcement period returns, and higher deal completion rates. Collectively, our results indicate that termination fee provisions are used as effective contractual devices in REIT mergers to further target shareholder interests.